Free-Float Market Capitalisation

A company’s free-float market capitalisation is the market value of its shares that are readily available for trading by public investors. In a free-float-weighted index, its weight equals this value divided by the combined free-float market capitalisation of all index constituents, subject to any index-specific weighting caps.

From total market value to free-float value

Total market capitalisation values all outstanding equity shares at the prevailing market price. Free-float market capitalisation adjusts this value to exclude holdings that are not normally available for public trading, such as promoter and strategic holdings, according to the index provider’s rules.

• Total market capitalisation = share price × total outstanding equity shares.
• The investible weight factor (IWF) represents the proportion of outstanding shares treated as available for public trading under the index methodology.
• Free-float market capitalisation equals total market capitalisation multiplied by the IWF.

How the index weight is calculated

For an uncapped free-float-weighted index, company weight = company’s free-float market capitalisation ÷ total free-float market capitalisation of all constituents × 100. Thus, weight depends on the company’s tradable market value relative to the other companies, not simply on its total size.

• Suppose Company A has total market capitalisation of ₹1,000 crore and a free float of 40%; its free-float market capitalisation is ₹400 crore.
• Suppose Company B has total market capitalisation of ₹800 crore and a free float of 75%; its free-float market capitalisation is ₹600 crore.
• In an index containing only these two companies, A receives 40% weight and B receives 60% weight, even though A has the larger total market capitalisation.

What the weight means for index movements

A company with a higher weight has a greater influence on the index’s return. Free-float weighting makes this influence reflect the value of shares available to investors rather than including all controlling or strategic holdings.

• If a constituent has 10% weight and its price rises by 5%, it contributes approximately 0.5 percentage points to the index return, with other prices unchanged.
• Relative price movements and revisions to shares or free-float factors can change constituent weights.
• Some indices impose weighting caps to limit concentration, so their final weights can differ from uncapped free-float proportions.